The ability to create bio-functional nanoprobes for the detection of biological reactivity is important for developing bioassay and diagnostic methods. This paper describes the findings of an investigation of the surface functionalization of gold (Au) and magnetic nanoparticles coated with gold shells (M/Au) by proteins and spectroscopic labels for the creation of nanoprobes for use in surface enhanced Raman scattering (SERS) assays. Highly monodispersed Au nanoparticles and M/Au nanoparticles with two types of magnetic nanoparticle cores (Fe2O3 and MnZn ferrite) were studied as model systems for the bio-functionalization and Raman labeling. Comparison of the SERS intensities obtained with different particle sizes (30-100 nm) and samples in solution versus on solid substrates have revealed important information about the manipulation of the SERS signals. In contrast to the salt-induced uncontrollable and irreversible aggregation of nanoparticles, the ability to use a centrifugation method to control the formation of stable small clustering sizes of nanoparticles was shown to enhance SERS intensities for samples in solution as compared with samples on solid substrates. A simple method for labeling protein-capped Au nanoparticles with Raman-active molecules was also described. The functionalized Au and M/Au nanoparticles are shown to exhibit the desired functional properties for the detection of SERS signals in the magnetically separated reaction products. These results are discussed in terms of the interparticle distance dependence of 'hot-spot' SERS sites and the delineation of the parameters for controlling the core-shell reactivity of the magnetic functional nanocomposite materials in bio-separation and spectroscopic probing.